Natural gas lights the way

Tuesday

Jan 15, 2013 at 6:00 AM

By Christopher R. Knittel

Natural gas and oil from new sources such as Bakken shale and Canada’s tar sands are being touted these days as keys to North American energy independence. This is understandable: Both natural gas and unconventionally produced oil are potentially large energy sources for the United States and the rest of North America that were not fully considered until recently. But their futures in the U.S. may be headed in opposite directions. Here’s why:

Many of our country’s most influential transportation decision-makers — especially state and local governments, vehicle manufacturers and long-haul shipping businesses — are working hard to make natural gas a much bigger part of our country’s transportation system. This follows a similar shift toward natural gas for generating electricity. Today one-third of all U.S. electricity comes from natural gas.

The primary reason for this shift is very simple: Natural gas is now so much cheaper to produce and so much more abundant than any energy analyst ever dreamed just a few years ago, we may very well be entering a golden age for natural gas.

A shift toward natural gas for transportation would be good news in many ways. It can increase our energy security by reducing our dependence on oil, thereby diversifying our transportation energy sources and reducing our economic vulnerability to high oil prices.

Natural gas-fueled transportation can also reduce transportation’s social and environmental costs.

For example, using natural gas for transportation fuel produces much less greenhouse gas and local pollution than petroleum-based fuels such as gasoline and diesel.

But natural gas-fueled transportation may not be good news for those who want to increase consumption of oil from sources such as the Bakken shale and Canada’s tar sands. Just as using more natural gas reduces the use of coal for electricity generation, increasing the use of natural gas for transportation could reduce the use of petroleum-based fuels such as gasoline and diesel.

Today those petroleum-based fuels account for nearly 95 percent of the total energy used for U.S. transportation. But even according to very conservative estimates, many decades worth of natural gas can be produced in North America at costs that would fall within the “oil equivalent” range of between $18 and $48 a barrel. And that means two game-changing things:

•Any business or governmental entity in North America that can potentially use more natural gas for transportation is now evaluating how to make that happen.

•Forecasts for U.S. transportation energy use (by far the biggest component of North America’s total) are inaccurate if they are based upon the assumption that petroleum-based fuels will continue to account for more than 90 percent of the total.

These critical economic facts give policymakers an opportunity to shift North American energy consumption strongly toward natural gas and away from all sources of oil — including oil from Bakken shale and Canada’s tar sands.

On non-economic grounds as well, increasing natural gas-fueled transportation could be more attractive to government policymakers than continuing to support the dominance of petroleum-based transportation fuels. With proper regulations to protect people and the environment, including appropriate geographical restrictions on fracking, expanding our natural gas production would lead to far fewer environmental and social problems than current oil production and refining.

When these non-economic advantages are added to the developing economic trends favoring natural gas transportation, the result is a very attractive scenario for investors. That’s another reason my money is on natural gas for the type of energy that has the brightest future for U.S. transportation.

Christopher R. Knittel is the William Barton professor of energy economics at Sloan School of Management and co-director of the Center for Energy and Environmental Policy Research, both at Massachusetts Institute of Technology.